Expense Ratios Of Long Term Mutual Funds In Decline

April 30, 2018

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The average expense ratios
of long-term mutual funds have been in decline for 20 years now, due to
increased demand for index funds and a continuing shift by investors in both
actively managed and index funds toward lower-cost funds, according to a report
from the Investment Company Institute.

In 2017, average annual
expense ratios for equity mutual funds fell four basis points to 0.59% from
0.63%. Average hybrid and bond mutual fund expense ratios declined three basis
points from their values in 2016, to 0.7% and 0.48%, respectively.

Longer term, the average
expense ratio of actively managed equity mutual funds fell to 0.78% in 2017,
down from 1.08% in 1996. Index equity mutual fund expense ratios fell to 0.09%
in 2017 from 0.27% in 1996. Investor interest in lower-cost equity mutual
funds, both actively managed and indexed, has fueled this trend, as has asset
growth and resulting economies of scale, the ICI report said.

Meanwhile, expense ratios of
money market funds continue to rise in response to the increase of short-term
interest rates associated with a firming of monetary policy, according to the
report. The average expense ratios for money market funds rose five basis
points in 2017 to 0.25%. This increase was connected to the Federal Reserve
raising short-term interest rates three times in 2017.

Expense ratios of
target-date mutual funds averaged 0.44% in 2017. Since 2008, the expense ratios
of these funds have fallen 34%. Because these funds are attractive to
individuals saving for retirement, investor demand for them has flourished in
recent years. Ninety-five percent of target-date mutual funds are funds of
funds, the expense ratios of which fell to 0.58% in 2017 from 0.65% in 2016.

Economies of scale and
increased competition are putting pressure on expense ratios of exchange-traded
funds. In 2017, the expense ratios of index equity ETFs fell to 0.21% (from
0.34% at their peak in 2009). Expense ratios of index bond ETFs, fell to 0.18%
in 2017 from a peak of 0.26% in 2013.

In 2017, average expense
ratios for index equity ETFs fell one basis point to 0.21%. Average index bond
ETF expense ratios declined two basis points from their value in 2016, to
0.18%.